We attempt to incorporate the monetary sector of the economy into the general equilibrium model and perform monetary and fiscal policy analysis. In particular, we model money, banking, international finance, and macroeconomic activity. In Chapter 2, we analyze the role and function of a mutual bank with variable fractional reserves, collateralized debts, active monetary policy and bankruptcy. We show the existence and optimality properties of the model and generate a taxonomy of the interaction between monetary policy and bankruptcy settlement with respect to the resulting equilibrium outcomes. In Chapter 3, we consider alternative mechanisms of financing seigniorage costs of producing money and analyze the nature of the resulting suboptimal equilibria. It is suggested that if one acknowledges that transactions technologies are forms of production, which require the consumption of resources for their financing, then the concept of Pareto optimality is inappropriate for assessing efficiency. Finally, we postulate a criterion for the unique minimal cash-flow equilibrium for efficient trade that minimizes the effective money supply. In Chapter 4, we present a general equilibrium model of international finance and examine the interrelationship of the nominal and the real sector of the economy. The model exemplifies non-neutrality of monetary policy and generates a non-trivial quantity theory of money as contrasted with the traditional models of current intertemporal macroeconomics. The policy analysis of government intervention and its effects on financial variables and real equilibrium outcomes is in accordance with Keynesian predictions and similar to the Mundell-Fleming model even though our equilibrating mechanisms are different and substantially richer. Moreover, genuine agent heterogeneity allows us to conduct welfare analysis. In Chapter 5, we show that the number of equilibrium outcomes are typically finite, i.e., locally unique. Nominal as well as real determinacy underlies monetary non-neutrality and generates a non-trivial quantity theory of money. The primary reason for nominal determinacy is the presence of positive private liquid wealth either in the form of monetary collateral (Chapter 2), or private monetary endowments (Chapter 4), or exogenously fixed positive interest rates (Chapter 3). In addition, the value of money is positive and determinate. Finally, even when private liquid wealth is zero as long as there exists active bankruptcy determinacy is maintained.
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